Earlier this week we previewed Gamestop (GME) earnings and detailed a stock alternative. The idea for the stock alternative was that GME had already pre-announced, and shown that buyers lurked below, in large part because of 25% short interest. That set-up meant that on the slightest bit of good news, the stock was likely to see a little rip. And bad news meant that it probably found buyers not too far below. That sort of asymmetric risk/reward can be taken advantage of with a risk reversal, where the buyer can participate on a short squeeze higher, is willing to be put the stock lower (based on assumption that shorts step-in to take profits and the stock would bounce) and based on little or no move in between a range, has basically a nothing down. Here was the trade idea in GME, willing to buy for 21, there for a move above 25, and risking just 10c in between those strikes:
GME ($23.60) Buy the Dec 21/25 risk reversal for 0.10
- Sell 1 Dec 21 put at .35
- Buy 1 Dec 25 call for .45
With the stock higher (26.35) this trade is now worth about 1.50. As far as trade management, you could either take the profits, of for those looking to stay in the name for more upside, the short put can be closed for .05 and the 25 call spread by selling the 28 call at .30. That would creat a 3 dollar wide call spread for a credit. All of the profits are at risk, but nothing more can be lost if the stock reverse, and another 1.50 or so can be made if the stock goes to 28 on Dec expiration.